Tax hikes on rich also hurt the 98%

The combination of the now-higher tax rates in California and President Barack Obama's campaign to raise tax rates on the top 2 percent of U.S. incomes will cause far more economic pain to the 98 percent than to the truly rich.

Let's start with the ruse that the truly rich will pay a lot more. These individuals have many ways to avoid higher taxes. The perfect case in point is Costco co-founder, director and former CEO Jim Sinegal, who supports President Obama's call for higher tax rates on family income above $250,000.

Costco recently announced that it would borrow $3.5 billion so that it could pay a special dividend of $7 a share before year-end. Call it a six-year advance on the company's current annual dividend of $1.10 per share. According to the Wall Street Journal, Mr. Sinegal will collect $14 million, which will be taxed at the current 15 percent rate instead of the 43.4 percent rate called for by the president he supports, saving Mr. Sinegal alone $4 million in federal taxes.

We normally think of taxes as being imposed on individuals or corporations. While true in the sense that individuals or corporations pay the tax, that notion also is misleading. A sales tax, for example, is paid by the merchant and charged to the customer, but it falls on the activity of the buying and selling of goods.

In exactly the same way, income taxes are levied on the generation of income through market activities or mutually beneficial exchanges. Just as higher tariffs lead to less international trade, an increase in marginal tax rates on doing business with the affluent leads to less domestic trade or economic activity.

Here is how it works. To clear $30,000, a married Californian filing a joint return with no dependents has to be paid nearly $37,500 to cover income and payroll taxes. But (assuming no alternative minimum tax), to produce $37,500 net of income and payroll taxes, their 2-percenter customer has to earn nearly $67,000! That's roughly the same as a 121 percent sales tax.

After Proposition 30 and under the president's proposal, individuals earning $37,500 would see no increase in their federal or state income taxes. But, the combined income/payroll tax rate on their customer would increase to 48.7 percent. That means, their customers would now have to earn $73,000, an increase of 9 percent, to pay them a net $30,000 after tax. It is as if they now charged a 143 percent sales tax.

Contractors, gardeners and all others who provide services to the “2 percent” now face a double whammy. First, their customers have less money to spend. And second, their pretax price just went up at least 9 percent. Such a price increase on families with less disposable income will lead to a combination of less employment and lower wages for those who do business with the 2 percent.

The family with an income of more than $250,000 may suffer the inconvenience of not upgrading their kitchen. But, the contractor loses all of the income that he would have earned, and the people he otherwise would have employed lose their jobs. Their ability to enter into mutually beneficial exchanges have also been impaired, leading to a further decline in income earning opportunities for the 98 percent.

“Tax the rich” may be a great slogan. But the consequences of those higher tax rates will fall most heavily on those with modest incomes.

Charles Kadlec is founder and CEO of Community of Liberty, Chapter One, a nonprofit in Orange County.

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